Fair, flair, and fools’ market value: the debate continues

BVWireIssue #60-1
September 12, 2007

Responding to Mike Pellegrino’s suggestion of a new standard, “fools’ market value." in the last BVWire, Robert W. Levis, CPA/ABV, ASA, CFE (Levis Consulting, Colorado Springs), writes:

The ‘market’ is the relevant marketplace for the subject company as of the valuation date.  A ‘hot’ market may yield an indication of value in excess of one using the income approach (e.g., DCF method) and ‘traditional’ methods of estimating the relevant cost of capital.  With all due respect, that does not necessarily make the ‘hot market’ investors fools.  Hindsight makes us all smart.

Financially sophisticated investors make these decisions with risk and reward expectations, and most of the time, they do so with a diversified portfolio perspective.  Strategic investors have their own reasons, which may be difficult to identify from the outside.  Although we, as a profession, may be well informed and knowledgeable about the companies we appraise, it would be foolish to ignore the relevant market and arrogant to profess that we are more knowledgeable than those active in the market.  I expect a lot more money could be made by those with such insights by participating in the market rather than appraising the businesses in the market.

Dexter Braff (The Braff Group, Washington, D.C.) comments: “I would argue that the 'rational' buyers Pelligrino is referring to are, for various strategic, synergistic, or market driven reasons ‘compelled’ to make certain acquisitions.  As such, by definition, their standard of value is not fair market value—rather it is ‘investment value.’  Sometimes the deals work out, and sometimes they don't.  But such investment value premiums are often necessary—and worthwhile—to acquire an attractive company in a competitive M&A market.”

“Your humorous poke at the IRS and attorneys regarding ‘flair’ market value was spot on,” says John C. Williams, CPA (Henjes Conner & Williams, P. C., Sioux City, IA), referring to the offhand quip that began this hands-on debate. “Very few appraisers have ever had to ‘eat their own cooking.’  I learned valuation techniques in the ‘kitchen’ of Beatrice Foods in the early to mid-70s where any of us who paid too dearly for a new subsidiary, paid for it with his or her career.  That kind of focus sharpens you unlike anything the [IRS or plaintiffs’ bar puts into their valuations].  I suspect none of them ever had to finance and pay for a business based on their determination of fair market value,” Williams adds.  Only those who do are the true valuation experts.  The rest of us are mere academics.”

Finally, John Borrowman (Borrowman Baker, Franklin, TN) may say it all with, “Flair market value.  Is that what you apply to mortgage-backed securities?”   Keep the comments, quips, and queries coming on this or any valuation-related topic by emailing the editor.

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